Is This The Fed's Secret Weapon?

Tyler Durden's picture

As the world anticipates Bernanke's speech on Friday - which most do not expect to explicitly say "NEW-QE-is-on-bitches" - we started thinking just what it is that he can suggest that would provide more jawboning potential. His speech is likely to lay out 'lessons learned' and outline the various conventional, unconventional, and unconventional unconventional policy options available (as we noted here). While open-ended QE, cutting the IOER, and 'credit-easing' are often discussed, none would be a surprise; this reminded us of an article from Morgan Stanley two years ago - after QE2 - that raised the possibility of Price-Level Targeting (PT), which is quite different from Inflation-Targeting. While its cumulative effect could be anti-debtflationary, it is however tough to communicate, reduces the Fed's inflation-credibility, and could be seen as inconsistent with the Fed's dual mandate. Our hope is that by understanding this possibility, the mistaken shock-and-awe is dampened.



Via Morgan Stanley; October 2010 - From QE2 to PT1?

...with likely little bang for the additional QE buck at this stage, the Fed is looking for ways to complement asset purchases with an appropriate communications strategy. Price level targeting (PT) could be such a strategy. While certainly not our central case, we think that the adoption of PT would be a reasonable course of action for the Fed, especially if downside risks materialise: preventing deflation is preferable to having to fight it.

And some Fed officials’ recent statements [which fits with Rosengren's recent comments also], as well as the minutes of the September FOMC meeting, suggest that PT is being debated within the FOMC. Under PT, the central bank has to make up for past misses of the inflation target. The advantage of PT is the automatic stabilisation of inflation expectations when the central bank misses the target; and inflation expectations are crucial for the transmission of monetary policy when interest rates have hit zero.


The difference between PT and the more familiar inflation targeting (IT) is that under PT the central bank has to make up for past misses of the inflation target, while IT lets bygones be bygones. This becomes crucial in times of sustained misses of the target. At present, the Fed would have to engineer inflation that is higher than its (implicit) target for a while, to make up for downside misses. The advantage of PT is the automatic stabilisation of inflation expectations when the central bank misses the target; and inflation expectations are crucial for the transmission of monetary policy when interest rates have hit zero.


We think that there are two crucial advantages to PT at the current juncture:

  1. PT would help to stabilise inflation expectations: Perhaps the most important channel by which monetary policy affects demand in the economy is through its impact on real interest rates. In an environment where the main policy instrument, the short-term policy rate, is constrained by the ‘Zero Lower Bound’, a CB can affect the real interest rate only through inflation expectations. According to New York Fed President Dudley: “ … [T]he further the Fed fell behind its inflation objective in the near term, the more inflation would need to increase in order to push the actual path of prices up to the path consistent with price stability over the long run. To the extent this policy was more credible, it might do a better job keeping inflation expectations from falling. This might make monetary policy more stimulative …”
  2. Debtflation: Making up for past inflation undershoots through higher inflation helps highly leveraged public and private sectors with their debt burdens

However, there are a number of objections to PT:

  • PT is difficult to communicate and hence not transparent: We disagree. The idea that past undershoots have to be compensated by overshoots such that inflation is on target ‘on average’ should not be difficult to communicate (‘average inflation targeting’). In fact, as the above example demonstrates, the Fed would only need to communicate four pieces of information: i) The price index to be targeted; ii) The average inflation target (say 2%) and hence the (slope of the) price path; iii) The starting point of the price path; and iv) The end point of the price path, at which the Fed exits PT and resumes normal service, i.e., reverts to IT. With this information, markets and the public could easily establish the implied average inflation rate. This could then be updated each month as new price index data comes in. Indeed, the Fed could itself publish the inflation rate it targets in regular intervals, e.g., as part of the statement following each FOMC meeting.
  • The credibility of the Fed’s inflation target could be jeopardised: This is indeed a risk; if mismanaged, it could unhinge the very inflation expectations it is meant to stabilise. It would ultimately lead to higher, not lower, real interest rates as nominal yields would climb. Yet, we think it is possible for the CB to minimise such risks if it handles the communications aspect of PT appropriately, e.g., by announcing the four basic parameters sketched out above and by clarifying that it is a temporary policy. Fed Chairman Bernanke himself has in the past, in a piece of friendly advice dispensed to the BoJ, expressed confidence that this risk should be manageable: “publicly announced price-level targets would help…manage public expectations and…draw the distinction between a one-time price-level correction and the…longer-run inflation objective”.
  • PT (and IT) is inconsistent with the Fed’s dual mandate: Not true, in our view. First off, the notion that PT/IT implies exclusive focus on inflation at the expense of the employment goal is a misunderstanding. In a world where monetary policy cannot permanently affect output and employment, all a CB can do is attempt to achieve the maximum sustainable level of employment that is consistent with price stability, exactly as the Fed’s dual mandate prescribes. But that is exactly what IT is about: under IT, a CB attempts to engineer a level of nominal spending (growth) that is consistent with stable inflation. Higher levels of spending would increase inflation; lower levels would decrease inflation. In short: stable inflation and sustainable employment are two sides of the same coin. Ben Bernanke again: “I subscribe unreservedly to the Humphrey-Hawkins dual mandate, and I would not be interested in the inflation-targeting approach if I didn’t think it was the best available technology for achieving both sets of policy objectives”.

Bottom line – it could be done: We think that the hurdles to PT are far from insurmountable in principle. At the current juncture – with a base case for inflation and real activity that FOMC members regard as “unacceptable” and plenty more potholes on the road to recovery – the bar is also lower than ever before. Throughout this crisis, CBs have shown that they are prepared to pull out all the stops to prevent the worst, and, most importantly, have understood that there are benefits to being proactive.


In the era of QE and CE (credit easing), moving from IT to PT is but a small step.

Yet, a small step for a central bank could be a giant leap for financial markets.

Full document below:

MS_Price Level Targeting

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Jason T's picture

sounds like stagflation

TruthInSunshine's picture

Script  & Scene {spotlight on podium at J-Hole; the very well-fed and somewhat inebriated crowd chatter dies to silence; the Bernank enters stage left; Steve Liesman has a non-nocturnal emission upon seeing The Bernank in the flesh once again; Hilsenrath ponders his future}


The Bernank will take the podium wearing a "suicider vest" rigged with tripwires that connect to the electronic printing press.  He'll proclaim that he is ready to be martyred on the altar of Modern Money Mechanics rather than hear any more suggestions that his monetary policy has failed (if true, economic recovery is the goal), and dare a single person to raise a single critical point or lob a single criticism at the Fed or any fractional reserve entity, proclaiming in a loud and flustered voice with a beet-red face that "I'll do it, bitchez; I'll go full-retard KrugmanSpaceAlienInvasionBrokenWindows on your asses!!!!"

nope-1004's picture

The stock market is one big price target.  Currency markets, ditto - the EUR is not allowed to fall.  Gold and silver - c'mon.... one big price target stuck in a range so as not to let out the truth about how broke this world is.

So now.........  Underwear at Target to be price targeted?  LOL.


ParkAveFlasher's picture

+1 sounds like stagflation

Also sounds like price "fixing" cartel, but when you can print and allocate currency by fiat, all prices are subject to the "fix". 

Any attempt to influence a price exclusive of pure supply and demand is a form of "fix".  Yet another obfuscation, the use of inglorious language to circumvent a simple fess-up. 


Hype Alert's picture

Sounds like an automated way to skim productivity gains so the FED is guarenteed their cut.  They set the inflation rate, they control the calculation of CPI and as the economy becomes more productive those "savings" will not be allowed to flow to the consumer as the FED will inflate it away without having to explain their changes.

Bicycle Repairman's picture

Isn't this what the FED does anyway?

TruthInSunshine's picture

Lewis Black tweet from minutes ago:


@FredHayek -

Bernanke will announce he will make debt disappear @ J-Hole & then rip fur off a live rabbit.

4horse's picture

IS THIS actually a fucking question  THE SECRET WEAPON


Attributing the desecration of Iraq to such generalities as “corporatism” or “imperialism” is baseless and unequivocally cowardly. Corporatism and imperialism are not living, breathing entities which determine the affairs of mankind. There are individuals behind every action of corporate greed and imperial interests. They have names. They have affiliations. And in the case of the illegal invasion, occupation and subsequent genocide against Iraq, every individual involved is .   .   .   a secret weapon?

Despite being the ancient land of the eternal Tigris and Euphrates Rivers, 70% of Iraq’s people have no access to water. 80% have no access to sanitation. 70% of Iraqis are unemployed, and 43% live in horrendous poverty (2). 5,800 Iraqis are detained in US prisons, overt and covert, for absolutely no reason, with absolutely no evidence, and 30,000 more Iraqis are being detained by the treasonous puppet government with no charges against them in the most inhumane conditions (3). These are undisputable facts. Now the questions are: Who are the criminals behind 20 years of atrocities? And why did they perpetrate such horrible, ungodly crimes against humanity  .  .  .  cause they're secret weapons?

It has been 20 years since the murderous sanctions of the supranational police force known as the UN were implemented in Iraq. These sanctions claimed over 1.5 million innocent lives including more than 500,000 children by starving them to death. It has now been over 7 years, since the Zionist-instigated, Zionist-designed, Zionist media-enforced occupation of Iraq began, and as of this moment, 1.5 million more innocent Iraqis have been slaughtered.
That’s 3 million human beings. Dead. In twenty years time. . . whose names will never be known, whose faces will never be seen, whose stories will never be told.
The utter devastation of Iraq has turned over 5 million Iraqis into refugees, internally and externally, and 5 million children into orphans. Tens of thousands of Iraqi girls and women have been victimized by Kurdish-Israeli gangsters who have criminal sex rings all across the Middle East from the Zionist entity to Turkey to Syria, after they turned to prostitution as a way to support their families  .  .  .  as secret weapons


Beam Me Up Scotty's picture

So, they will print, and then use those dollars to either buy some item to prop up the price, or subsidize the item to cap the price?  Gas shortages HERE WE COME!!

techperson's picture

There's a "Zero Lower Bound"? Did anyone tell Bernanke? I'm sure he needs a good laugh.

NIRP is coming!

Deathrips's picture

Yeah....Morgan Stanleys gonna take the fall for this. They were in the club. But now they're not.


fonzannoon's picture

How about we just cut to the chase and they send me a fuckin check?

ParkAveFlasher's picture

No no, you might buy dangerously inert physical precious metals, comic books, etc.  Calm down and let Mother decide what's best. 

LongSoupLine's picture

Margin Stanley?...really?



Deathrips's picture

I know. They are scum too...but, I think they pissed on the wrong shoes.

stocktivity's picture

Romney has said he would fire Bernanke. Obama would keep him. I know both candidates leave much to be desired but that one difference swings my vote to Romney.

fonzannoon's picture

and you think Romney is going to put an inflation hawk in there? The first thing Mittens is going to do is raise that debt ceiling. The second thing is eliminate those automatic spending cuts and the third thing is extend those tax cuts and the fourth thing is......

LawsofPhysics's picture

...get the fuck out of dodge.  Neither candidate can solve this, simply battling for the "free money" faucet while it lasts.

Mitt supports bailouts (fuck, Bain Capital has been bailed out) Obama supports bailouts, and neither one talks about prosecuting the fucking fraud (where is John  Corzine?) or the fact the the majority of the debt is fraudulent itself.  Bankrupt compaines get bailed out, the owners, management and stockholders continue to live large and the taxpayer gets fucked.

Same as it ever was, stupid fucking sheep.

fonzannoon's picture

Giant douche or turd sandwich? Very tough decision.

LawsofPhysics's picture

Write in Ron Paul, sleep well...


optimator's picture

I've always felt great after voting for Dr. Paul!

Hype Alert's picture

My big issue with this is what happens with 4 more years of stacking the Supreme Court by Barry if write in's dilute it too much.  Roberts didn't help much, but if getting the point across tilts the court way left, I don't see it being worth it.


LawsofPhysics's picture

If "ifs" and "buts" were candy and nuts, we would all have a merry X-mas.  Life is hard, suck it up pussy.  News flash; it won't matter either way.

john39's picture

Romney, Obama and Bernanke are all powerless puppets, role-playing.   they are meaningless and it is a waste of time to try and figure out what any one of them might be thinking.  They do not make important decisions, period.

stocktivity's picture 4 more years of Obama is better???

fonzannoon's picture

IN some ways I would say it is because at least we hit the wall a little faster. But more importantly as LOP points out, whatever it is will be so you may as well vote your conscience.

MeelionDollerBogus's picture

It's all votes for Goldman Sachs.

If you want to vote against Goldman Sachs you have to choose something like Gary Johnson.

Cassandra Syndrome's picture


NEW-QE-is-on-bitches, bitchez.....

ekm's picture

I don't even need to read the literature in order to say that Price Targeting is what they've been doing so far.

The problem with targeting price is that there is only one way to handle it: BUY BUY BUY AND BUY THE THING YOU ARE TARGETING THE PRICE FOR.

Hence, Primary Dealers buying stocks. And they will and very slow volume in order not to run out of money.

It is just another attempt to lure suckers, nothing else. It could very well be that Morgan Stanley is swollen with stocks nobody wants and desperately trying to lure suckers.

fonzannoon's picture

If people can't see the desperation here they are clinically insane. Whether it is MS or anyone else banging the drum. The only question is when does the levy break.

Remington IV's picture

Morgan Stanley = giving a machine gun to a monkey

LongSoupLine's picture

why you gotta insult monkeys like that?

Pairadimes's picture

Morgan Stanley's newest Brokerage office in Africa:


Deep79's picture



LawsofPhysics's picture

What rubbish.  MS is deep shit. Besides ZIRP is QE!!!  Can't wait for NIRP.

Just think about it, the bank will be paying you to take out a loan (of course the currency will be worthless).

malikai's picture

If you calculate inflation properly, we're already several years into NIRP.

LawsofPhysics's picture

nominal terms yes, so where is my check?  I will take out a loan if they pay me interest.  Oh, I see, NIRP is only for the banks.  FAIL.

trebuchet's picture



UK bank current loan offers: 4.5-5% on a secured loan - they want second source of income sufficient to cover the loan repayments + max 40- 50% loan to asset value plus unencumbered/secured assets as collateral for the full amount of the loan... 


... exactly WHY are banks LOSING money when they derisk their loan portfolio to such an extent? They must have so much existing CRAP on their books. 

However, under these terms, they are happy for a 100% equity financed venture to establish a 5 year record at which time they will do an equity release loan..... So let me get this right, when the smart money wants to get out of their business the banks bring in the debt.  and they think they are being smart about their lending practices.


Oh well, no 15% ROE underpinning UK bank equity for a LONG time to come with current policies. 


As for the post, Price level targeting is well, put it this way: CBs have MISSED their inflation targets for the last few years which is a relative target, and now they are going to try to hit an ABSOLUTE price level? 


This isnt stagflation its impossible





TruthInSunshine's picture

It's the 'Zombie Economic Model' in action, sponsored by Modern Money Mechanics/Fractional Reserve Banking hikacking of whatever was left of an actual, organic economy.

Member banks having access to the Fed's overnight window get 0.25% loans (that can be perpetually rolled over), and then they simply have to find any vehicle yielding greater than 0.25%, whether treasuries or corporate bonds, to bank 100% guaranteed profits (since the old banking model of loaning money to individuals and businesses is sooo last decade/century).

This props up what are actually de facto insolvent banking/financial institutions, especially when it's coupled with legislation allowing these institutions to mark their moldy assets to unicorn & pie-in-the-sky fictional valuations, and allows for the crowding out of real, productive economic activity.

Now, on those seemingly rare (and getting more rare) occassions when individuals and businesses do get banks to loan them money, whether for operating capital, auto purchases or what have you, those loan rates are literally 10x to 40x what the banks are paying to borrow money from the Fed (an auto loan or home mortgage at 2.5% or 3.8% is 10x and 18x what the bank borrowed the money for, respectively), in its infinite wisdom. So it's about as lopsided an arrangement against real economic activity in favor of keeping zombie, failed financial institutions on life support as can be.

The Bernank Hath Broken All Markets.

youngman's picture

I think ben is going to speak in Chinese....that will be the wow factor...

KidHorn's picture

IT is the first derivative of PT, so if you implement IT or PT, you're automatically implemeting the other.

walküre's picture

Morgan Stanley won't live to see the day past October. But their analysis makes for great parody going forward. "Remember the day when Morgan Stanley .."